Meme stocks, including the notorious GameStop, have surged in recent weeks, recalling the flash crash of 2021 where short sellers got slammed by the retail army, bringing trading platforms screeching to a halt. With prices soaring once again, are institutional investors still on the line, or are things different this time around?
GameStop jumped in price yesterday after Keith Gill (AKA Roaring Kitty) – one of the prime movers behind the 2021 short selling squeeze – was revealed to be holding a reported 5 million shares worth US$115.7 million, as of last Friday’s closing price.
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After a post on Reddit appeared to reveal Gill’s substantial holdings, shares in pre-market trading on Monday were about 84% higher to US$42.55. While Gill’s return has clearly affected GameStop’s share price, the effect on the wider markets this time has been comparatively muted.
Gill tweeted for the first time in three years in the early hours of 13 May. As a result, GameStop stock saw a similar bump, up 82% just before 10am EST 13 May. But according to Vanda Research, only US$15.8 million was pumped into GameStop, compared to US$87.5 million in 2021.
Hedge funds are less exposed to the social media-driven surges associated with meme stocks this time around. Melvin Capital, which bore the brunt of the 2021 short squeeze, shuttered in 2022. Having learned their lesson, most hedge funds now aren’t shorting – although some are making long bets on the market Renaissance Technologies for example, the algo firm founded by the late mathematical trading legend Jim Simons, reportedly owned 1 million GameStop shares at the end of March, a position worth US$13 million at the time. The brief GameStop surge in May valued RenTech’s stake at US$65 million.
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The events of 2021, which some suggest saw Gill turn a roughly US$50,000 investment into US$50 million on the back of a 1,700% share value increase through the first few weeks of January 2021, led to Congressional hearings and investigations by the US Securities and Exchange Commission (SEC). Retail trading app Robinhood sought to protect institutional investors, much to the chagrin of retail traders, by halting trades in rocketing meme stocks on the app. After the craze died down, Gill dropped off the internet and disappeared from view.
While the SEC made no formal statement on May’s GameStop jump, former SEC chair Jay Clayton said in an interview with CNBC that meme stock frenzies are bad for financial markets.
“There is nothing illegal about saying I like a stock,” Clayton added. “There are things illegal about saying I like a stock and taking activity in the marketplace that’s designed to drive behaviour.”
The meme stock surge is also credited with catalysing the major ongoing SEC market structure reforms, with the 2021 ‘GameStop saga’ highlighting risks around payment for order flow, and the retail reliance on a small number of market makers.
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“The events of last January gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible,” SEC Chair Gary Gensler said in 2022.
With the ongoing reforms creating significant controversy in the US market, it remains to be seen the impact they will have when (or if) they are finally enacted. And with a potential change in US political administration on the cards later this year, it could be all change once again for the financial markets.
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